MANAGEMENT

Firms’ CEO dilemma: Insider or outsider?

Some seek tried, true; other companies risk it

Software giant Microsoft this week tapped 22-year company veteran Satya Nadella for the top job of chief executive.

NEW YORK — Companies looking for a leader face a big question: Pluck a chief executive officer from the rank-and-file or a fresh face from outside the organization?

Microsoft Corp. decided to take the former path. The software giant on Tuesday tapped 22-year company veteran Satya Nadella for the top job. But not before reports that they were considering outside candidates, including Ford Motor Co.’s CEO, Alan Mulally.

The appointment suggests the company isn’t looking for a radical change in the way it operates. It’s a move companies including Coca-Cola Co. and Chevron Corp. have made to fill their corner offices. Some companies, such as Procter & Gamble Co., even make a habit of grooming CEOs from within.

While outsiders may bring a fresh perspective, they have more risk. Homebred insiders can bring many other benefits to the CEO suite, such as extensive knowledge of the company’s structure and culture.

That’s a big reason why about two-thirds of CEOs traditionally have been hired from within, said Sydney Finkelstein of the Tuck School of Business at Dartmouth and author of Why Smart Executives Fail.

“There’s always more risk when you go outside,” said Bob Damon of the Americas for Korn Ferry, an executive search firm.

Some companies have gone with outsiders. Some even try one route, and then go back the other way when that fails.

Experts say more companies will likely look to outsiders in the years to come. Here are some examples of the two paths:

BEST BUY: OUTSIDER

Best Buy Co. Inc. faced a double whammy in 2012: CEO Brian Dunn left amid allegations that he violated company policy by having an inappropriate relationship with a female employee. Meanwhile, its business was eroding because of tough competition from discount stores and online retailers.

Since then, Best Buy has cut jobs, closed stores, changed store layouts, and implemented a price-matching policy to compete with online rivals and discounters. Disappointing sales during the holiday season have raised concerns about the electronic retailer’s plan.

But most analysts say Best Buy is in a better position than it was before Mr. Joly. Share movement shows investors seem to back Mr. Joly; the stock has nearly doubled since the start of 2013.

COCA-COLA: INSIDER

CEO Muhtar Kent joined the world’s biggest soft-drink maker as a marketing trainee in New York in 1978 when he was 25. Mr. Kent has talked about the months he spent on delivery trucks, getting up before dawn to stock shelves and build displays at grocery stores.

He went on to hold various leadership positions around the world, including general manager of the Turkey and Central Asia region and president of the East Central Europe region.

Since he became CEO in 2008, Coca-Cola has taken market share away from rival PepsiCo Inc. and expanded its footprint in developing markets. Still, Coca-Cola has been struggling to grow sales of its flagship soft drink business at home and in other developed nations.

CHEVRON: INSIDER

Thirty years after joining the company as a financial analyst, John Watson ascended to the CEO spot in 2010.

Chevron Corp. has been one of the few big oil firms to grow its production, making the company and Mr. Watson a favorite among investors. He has been spending enormous amounts of capital — $41.9 billion last year — on giant oil and gas projects in Australia, the Gulf of Mexico, and elsewhere to keep production growing.

Investors have become more cautious, however, because some of those projects are turning out to be more expensive than projected.

J.C. PENNEY: OUTSIDER, THEN AN INSIDER

In late 2011, Ron Johnson, the mastermind behind Apple’s stores, succeeded Mike Ullman as CEO at J.C. Penney Co. Inc. His honeymoon with investors was short after he got rid of coupons and most sales in favor of everyday low prices. The business started to nosedive.

Penney recorded nearly $1 billion in losses and a 25 percent drop in revenue in his first year. In April, the board fired Mr. Johnson and rehired Mr. Ullman.

Mr. Ullman still faces big challenges. The company has posted sales drops and big losses in the first three quarters of the current year. And while Penney announced Tuesday that its fourth quarter marked the first quarterly gain for a key revenue measure in more than two years, investors were hoping for more. The company’s shares fell nearly 11 percent.

P&G: INSIDER

Procter & Gamble Co., the world’s biggest consumer product company, is known for grooming its CEOs from within over many years. It has only had 12 CEOs in 12 decades. Its current CEO, A.G. Lafley, is in the role for the second time.

During his first tenure, he worked to acquire Gillette in a $57 billion deal, cut jobs, and sold off company food brands. Then he retired in 2009.

Restructuring continued under CEO Robert McDonald, but investors grew restless about how long the turnaround was taking. The board rehired Mr. Lafley as CEO in May.

Since then, the company has reported mixed results.

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